Friday, October 30, 2015

Allocation and Exchange: A False Dichotomy

I keep encountering the claim - apparently originated by James Buchanan - that there is an opposition between the "allocation paradigm" (supposedly stemming from Walras) and the "exchange paradigm" (supposedly stemming from Menger), where the former is supposed to lead to formalism, mathematization, mechanomorphism, social engineering, and everything else that is bad about contemporary mainstream economics.

However, the person who expliticly defined the "allocation paradigm", understood as the notion that the science of economics is about studying the allocation of scarce means to competing ends, was none other than Lionel Robbins, a methodological disciple of Mises and an avowed praxeologist. And clearly nothing in his exposition of the paradigm in question implied the neoclassical assumptions of perfect information, static equilibrium, etc. In other words, the theory of monetary market exchange (catallactics) can be safely subsumed under the allocation paradigm, which, as defined by Robbins, is at the core of praxeological economics. What lends further support to such a conslusion is the fact that catallactics is just one part of (praxeological) economics - for instance, the rudiments of the theory of value (including the law of diminishing marginal utility), the theory of capital, and the theory of production are best elucidated by relying on a consciously and explicitly non-catallactic mental construction of Robinson Crusoe economy.

In sum, calling the Walrasian paradigm the "allocation paradigm" and pitting it against the supposedly competing and superior "exchange paradigm" seems to me to be a serious methodological mistake, especially jarring when made by the adherents of Austrian economics.